Kirk S. Barth CFP®, CLU®, ChFC®, LUTCF

Universal Life for Flexibility

Universal life insurance accounted for 38% of all new life insurance premiums in 2015.1 What’s the appeal of this type of coverage? In a word: flexibility. If you have a need for life insurance, you might consider the choices offered by universal life (UL) and the related product, variable universal life (VUL).

Protection and SavingsBoth UL and VUL combine a death benefit with a savings element. A portion of the premium pays for the pure cost of insurance. The remainder of a UL policy premium is invested in the insurance company’s general investment portfolio, with the potential to build cash value. Most UL policies pay a minimum guaranteed rate of return. Any returns above the guaranteed minimum vary with the performance of the insurance company’s portfolio. The policyholder has no control over these investments.

With a VUL policy, you can choose to invest your cash value in a variety of investment options. Though the value of your policy has the potential to grow more quickly, it is also subject to greater risk. The investment return and principal value of the investment options will fluctuate. If your investments do not perform well, your cash value and the death benefit (which are not guaranteed) may decrease.

Adjusting for Life ChangesWith both types of policies, you can vary the frequency and amount of premium payments, as well as increase or decrease the death benefit (subject to underwriting for increases). For example, if your financial situation improves, you could increase your premiums and build up the cash value more rapidly.

On the other hand, if you find yourself under a financial strain, you could reduce your premiums or possibly deduct premium payments from the cash value. (Many policies can be structured so that the invested cash value will eventually cover the premiums.) Of course, the premium will affect the rate at which your cash value accumulates. A reduced premium may also reduce the size of the death benefit, depending on the policy and cash value.

You can generally make tax-free withdrawals, up to the amount paid in premiums, or borrow against the accumulated cash value. Although policy loans accrue interest, they are free of income tax as long as they are repaid and usually do not impose a set schedule for repayment. When policy loans, withdrawals, and investment losses reduce the policy’s cash value and death benefit, additional premium payments may be required to keep the policy in force.

In addition to premiums, there are contract limitations, fees, and charges associated with UL and VUL insurance. They can include mortality and expense charges, account fees, investment management fees, administrative fees, and charges for optional benefits. If a policy is surrendered prematurely, there may be surrender charges and income tax implications.

VUL investment options are not guaranteed by the FDIC or any other government agency; they are not deposits of, or guaranteed or endorsed by, any bank or savings association.

Variable universal life is sold by prospectus. Please consider the investment objectives, risks, charges, and expenses before investing. The prospectus, which contains this and other information about the variable universal life insurance policy and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) LIMRA, 2016

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

Special Needs Hawaii is independent of John Hancock and Signator Investors Inc.